Maximize trading profits : Mastering the art of spread optimization

A reminder about the spread : what is it exactly ?

Before explaining how to optimize spreads and find the best opportunities, we will remind you of the basic principles of spreads.

The spread in trading is the difference between the buying and selling price of an asset. When he buys, the trader pays a certain price, which will always be higher than the price at which he can resell his security (at the same time).

This difference is called the spread and constitutes the transaction fee, the broker’s margin. These fees are part of the brokerage fee, which is the overhead that a broker applies to a trade.

It is particularly important to take it into account because it has a direct and immediate impact on your trade. When you open a position, you are directly in the negative.

For example, if the spread is 2 and you open a trade. You are instantly at -2. This is important to take into account in your analyzes and your purchase. This difference is all the more marked as the amount of your trade will be high.

What are the different types of spreads ?

There are several types of spreads applied by brokers. The two main ones are :

• The fixed spread
• The variable spread

In addition to varying between brokers, spreads are also different depending on the financial asset. For example, in FOREX (the currency market), not all pairs have the same spread.

The most common type of spread is the fixed spread, which is the simplest and most direct type of spread. With a fixed spread, the broker sets a price that will remain the same regardless of market conditions. This type of spread is appreciated by novice traders because it is easier to understand and anticipate.

However, since the price is fixed, this type of spread can sometimes be less advantageous during periods of high volatility when the market moves quickly. For more experienced traders, a variable spread may be a better option.

A variable spread changes according to market conditions. Which means it will expand or shrink depending on market volatility. This makes it a riskier option, but more advantageous during periods of high volatility, as the trader can take advantage of smaller spreads at times.

However, even for experienced traders this is difficult to predict and variable spreads can be dangerous.

Quelles conditions modifient le spread variable ?

Here are some of the conditions that can cause a variable spread to fluctuate :

1. The amount of liquidity in the market : When there is more liquidity (more people buying and selling), the spread will be narrower because there is more competition between buyers and sellers. This is therefore a more conducive time for traders to execute trades.
2. Time of day: The deviation can also vary depending on the time of day. During periods of high volume (such as when the market opens), the spread will be smaller because there is more competition between traders to buy and sell assets. Conversely, during periods of low volume (like overnight) the spread will be narrower as there are fewer traders in the market
3. News : This is obviously a parameter that has a huge influence on assets. Certain news can sometimes cause the price of an asset to swing in one direction or the other, which has a direct effect on the spread
4. Market volatility : The more volatile a market, the more the spread will tend to increase

What are the ways to optimize a spread ? Our advices

There are different ways for you to save on spreads to have the smallest possible and maximize your earnings. We are going to show you several concrete techniques that will help you benefit from the best spreads on the market.

Choose a good broker

Our first advice to avoid paying excessive spreads is to probe the market and the spreads practiced by brokers.

To do this, the easiest way for you is to visit the sites of the brokers directly. Spreads change regularly and each asset has a different spread. The easiest way is therefore to choose the asset in which you wish to invest and to browse different platforms to have the current spreads offered.

However, you can find in the table below, a list of the main brokers as well as the spreads practiced in FOREX (+ the BTC/USD pair in crypto) :

One of our main tips is also to test several brokers and diversify your investments on several platforms.

Choose the type of order you place carefully

In trading, there are several types of orders that can be placed :

• Market orders
• Limit orders

When you place a market order, you are instructing your broker to buy or sell the asset at the current market price at the time you place your order. This is then added to the order book and will be placed as soon as possible. This type of order can be useful if you want to act spontaneously and you spot an opportunity to seize quickly.

However, it can be dangerous in times when many orders are created because between the time you place it and the time it actually passes, the price may have changed. In addition, spreads are generally higher on market orders than on limit orders.

A limit order is an order placed with anticipation. The trader will decide to place an anticipatory order at a certain price and for a certain quantity, whether buying or selling. When his limit order is placed, he has nothing more to do and the transaction will be done automatically when the price reaches the one that has been set.

This type of order requires prior study and is more prudent. Indeed, in trading, we know that emotions are our worst enemies and often, when we act on the moment, it is because we are acting on the spur of an emotion.

By placing limit orders, you are forced to have thought about this choice and you act more cautiously.

In addition, spreads in limit order are generally lower than in market. We therefore strongly advise you to place this type of order as a priority to optimize the spreads you pay.

Limit costs

While spreads are a form of fee that the broker charges to make money, they are not the only ones and there are other fees that you can easily save on as a trader.

There are inactivity, deposit and withdrawal fees. Not all brokers practice them, but make sure you know them well before you start trading with a broker. However, these do not directly influence your trades but rather your overall activity with the platform.

Directly related to your trades are swap fees.

This is another type of fee you encounter when trading. Concretely, the swap is a fee that you pay when your trade is still open between a time of closing and reopening of the markets.

For example, if your trade is still open when the markets close at 4:30 p.m., you pay the swap. It’s the same when your trade remains open between the close on Friday and the reopening on Monday.

Our advice is therefore not to trade overweek (which goes from one week to another) and to prefer day trading which protects you from any type of swap.

Conclusion

Spreads are an important part of trading and by understanding how they work, traders can optimize their investments to try to have the smallest spreads (and therefore pay the lowest fees possible).

We have explained to you the types of spreads that exist and some concrete ways to benefit from small spreads.

It should be kept in mind that brokers are mainly paid on the spreads. The advantage is that they make money no matter what and each time you open a trade.

It is important to research the market well before registering on a platform and trading. Indeed, your gains (and losses) can be fundamentally different depending on the spreads you are exposed to.

Always stay alert and informed !